A) You decide to open an individual retirement account (IRA) at your local bank that pays 8 %/year compounded annually. At the end of each of the next 40 years, you will deposit $4,000 into the account. Three years after your last deposit, you will begin making annual withdrawals. What annual amount will you be able to withdraw if you want the withdrawals to last forever?
B) Parker County Community College (PCCC) is trying to determine whether to use no insulation or to use insulation that is either 1 inch thick or 2 inches thick on its steam pipes. The heat loss from the pipes without insulation is expected to cost $2.00 per year per foot of pipe. A 1-inch thick insulated covering will eliminate 79 % of the loss and will cost $0.25 per foot. A 2-inch thick insulated covering will eliminate 92 % of the loss and will cost $0.90 per foot. PCCC Physical Plant Services estimates that there are 220,000 feet of steam pipe on campus. The PCCC Accounting Office requires a 10.5 %/year return to justify capital expenditures. The insulation has a life expectancy of 10 years.
What is the present worth of each option?
No insulation: $______
1-inch insulation: $______
2-inch insulation: $______
Which insulation (if any) should be purchased using a ranking present worth analysis?